Reading ComprehensionDifficulty: Medium

PT157 S4 P2 Q8 ExplanationWisdom of Markets

A free, expert breakdown of this official LSAT Reading Comprehension question.

TopicsPrimary PurposeSociety

Keep going in LSAT Lab

  • Save & drill this skill — build targeted practice sets from questions like this one

  • Video walkthroughs — watch every question solved step by step

  • 81 official LSATs — as questions, timed sections & full-length tests

Start practicing free

Free to start

Full official LSAT questions are available through LawHub. This page provides LSAT Lab's explanation, strategy, and review tools without republishing the full official question.

Passage

Passage

Markets, such as stock exchanges, distill the collective wisdom of millions of individuals into a single number, and they do so with amazing efficiency. In contrast to other information-gathering institutions, such as committees and polls, markets require participants to put hard dollars behind their opinions. What's more, markets reward people who are most aggressive or who have the most degrees after their name.

Some markets have been engineered for the purpose of providing forecasts. For over a decade, an academic project called the Iowa Electronic Markets has predicted the outcomes of certain elections better than 75 percent of the polls did. Investors put money into a pool. If there are two candidates, each dollar invested then the market as a whole thinks candidate A has a 53 percent chance of winning.

Markets are highly "efficient," in the sense that the market as a whole learns—lightning fast and very accurately—what informed people know. In one experiment, a dozen participants were permitted to trade a fictional stock, having been told that it was worth one of three possible amounts. Two of the participants were then of the market price, and within seconds, everyone was acting as if they were insiders.

Passage

Markets are not infallible. To many people, this statement is a form of economic blasphemy. I suggest get over it.

In a recent election, the Iowa Electronic Markets had the eventual winner trading far lower than an opponent up until a few days before the event. For almost a solid year leading up that the opponent would win easily.

Think of markets as racetracks: you get paid lower odds the better the horse looks before a race. When the nag appears ill, old, or tired, the odds are highest, and buyers get the greatest potential payoff. When the steed starts to a win starts looking more and more likely.

If "prediction markets" do not actually predict the future, then what do they do? I suggest they merely reflect the majority opinion at a given moment. That does not imbue them with any special omniscience. Think of them as polls that avoid random spoofing because the polled must pay an entry fee guess. Like the majority, sometimes they are right, and sometimes they are wrong.

What this question is testing

Primary Purpose

Anticipate

Both passages are basically having the same argument from opposite sides of the table. Passage A says markets are amazing at gathering and distilling information. Passage B says markets are not as smart as everyone thinks. Strip away the disagreement and they are both answering the same question: are markets good at producing reliable information?

Goal

Find the shared question. It should be broad enough that both "markets are brilliant" and "markets are fallible" count as answers to it.

Reading along? Open the full official question in LawHub — we show a fragment here and keep the reasoning in our own words.

The question
8.

Both passages are primarily concerned with answering which one of the

Answer choices, explained

  1. Too Narrow2% picked this

    Is collective wisdom more reliable than

    The fact that this doesn't reference the main character, markets, is an instant red-flag. Even if tried to relate this question to the discussion of markets, neither passage was comparing market wisdom to the reliability of individual judgment.

  2. Too Narrow10% picked this

    What can be learned from studying the movement of

    Passage B never talks about stock markets specifically, just markets in the general sense. Even Passage A is centered around talking about markets, not the stock market. Its very first sentence says "Markets, such as stock exchanges". Even if this were switched to "markets" rather than "stock markets", it would still probably lose out to (C). The passage was more about what can be learned from markets, even if there's no movement to a given "stock". What does it say about something if the market value of it is high vs. low? This answer makes it sound more like it's about "what does the movement tell us"?

  3. Correct79% picked this

    Can markets be used to elicit

    Why this is right

    Passage A would answer with a resounding YES, since she thinks that markets distill the collective wisdom of millions. Markets reward people who are right (i.e. they have a connection to objective reality). Passage B would answer this with a NO, since he things that markets are fallible, markets can send the wrong message for long periods of time (based on what the eventual outcome turns out to be), and markets just give you a snapshot of majority opinion which is sometimes right / sometimes wrong.

    Skill tested: Primary Purpose · how this choice captures the passage's function is the move to repeat next time.

  4. Too Narrow6% picked this

    Are opinions more likely to be true when people will stake

    The fact that this doesn't reference the main character, markets, is an instant red-flag. Both passages seem to agree that opinions are more likely to be true when people stake money on them (Passage A's 1st paragraph / Passage B's 3rd paragraph), but for neither passage would we say that this was the question the passage was primarily concerned with. Again, both passages were about markets, and so the primary concern needs to be about markets.

  5. Too Narrow3% picked this

    Are markets that are engineered to predict election results as efficient as

    Neither passage compares the efficiency of stock markets to election-predicting markets. Passage A seems to think of all markets as being efficient. Passage B never even discusses stock markets.

Continue the review in LSAT Lab

Save this question, watch the video walkthrough, and drill similar questions in your LSAT Lab account.

Save and practice this skill
LSAT Lab

Turn this review into a targeted study plan.

Save this question, drill more like it, watch the video walkthrough, and track your progress in your LSAT Lab account.

Start practicing free